Apple's two new iPhones target high, low-end markets

Phil Schiller, senior vice president of worldwide marketing for Apple Inc, talks about the pricing of the new iPhone 5C at Apple Inc's media event in Cupertino, California September 10, 2013.Stephen Lam

CUPERTINO, California (Reuters) - Apple Inc (AAPL.O) unveiled a high-end iPhone with a fingerprint scanner as it tries to stand out in a crowded market, and a cheaper, colorful plastic model for emerging markets that proved pricier than expected.

Apple did not disclose pricing in China, its largest market, or whether it had sealed a long-awaited distribution agreement with China Mobile Ltd (0941.HK), although pricing is likely to be released at a Beijing media event scheduled for later on Wednesday.

Details of the two models, the 5S and the 5C, had been telegraphed ahead of time in several media reports, leaving the launch devoid of major surprises, and Apple shares dropped more than 2 percent.

The "iPhone 5C" comes in five colors -- blue, green, pink, yellow and white -- and starts at $99 with a contract. U.S. phones are also available for $549 without a contract, a higher-than-expected price that is important because many emerging markets sell such so-called 'unlocked' phones. Actual prices in emerging markets have not been disclosed.

"Previously we thought the 5C would be a lower-end phone to address emerging markets like China and India," said Gene Munster, analyst with Piper Jaffray, adding that based on the price it appears that Apple "still plays in the higher end of the market."

The pricier "5S" begins at $199 with a contract and also comes in three colors - gray, silver and gold - and sports expected improvements in processor speed, an improved camera along with a fingerprint-scanner that can unlock the phone with just a touch.

Apart from a more powerful processor than in the 5C, it embraces other cutting-edge features such as a dedicated "M7 Motion co-processor" chip, which can track motion data continuously without heavily draining the battery. The chip opens the door for the iPhone to better track sports and fitness-related user activity.

"For me this is an Apple brilliance where you see them going after the wearable device in a way that makes sense to them today, which is by not adding a device that is not ready from a design perspective," said Carolina Milanesi, an analyst with Gartner, who added that this chip will help Apple learn from consumers and help prepare the developers for any eventual Apple entry into the space.

Apple stock had gained more than 11 percent over the past month, in a rally that typically happens ahead of a big product launch.

"We are just seeing an aspect of device numbing or resistance, meaning it takes more and more to thrill and excite the consumer," said Jonathan Kanterman, an independent alternative investment consultant.

"Are you going to go out and upgrade to the new 5S if you just bought a new iPhone within the past year? Probably not."

BLUE, GREEN AND GOLD

The cheaper phone goes on sale online on Friday, while the pricier gadget can be pre-ordered on September 20. For the first time, it will sell in China at the same time as in the United States, a move expected to severely curtail the underground market for smuggled phones in the world's No. 2 economy.

The broader color palette and lower price for Apple's flagship product mark a departure from its reliance on a premium brand and familiar black and white gadgets. The world's most valuable tech company is trying to beat back rivals Samsung Electronics Co Ltd (005930.KS) and Huawei Technologies Co Ltd HWT.UL in markets including India and China, where it is quickly losing ground.

"It means Apple will hold on to margins but clearly they are not going after the very low-end of the market, which will disappoint some investors," said Shannon Cross of Cross Research. "This is their first foray into multiple colors and the plastic back. Keep in mind by next year they would have probably have discounted this down, so I think there's still opportunity."

"We didn't expect iOS7 to be revolutionary and I don't think consensus did either. Look for 64-bit iPad in the near future," said Stallings, whose DoubleLine bought Apple shares at around $405.

The five colors of the new iPhone 5C and the new case for the phone are seen at Apple Inc's media event in Cupertino, California September 10, 2013.Stephen Lam

CEO Tim Cook told an expectant crowd at the company's Cupertino headquarters he expects Apple to ship the 700 millionth device - an iPhone or iPad - based on iOS mobile software sometime next month.

Wall Street approves of his move to offer a more basic version of the device, although some investors warned initially that it would reduce margins and potentially tarnish a brand that has been linked to premium users since its 2007 inception.

Now they hope a bigger emerging-market presence can help reverse a 29 percent fall in the company's share price since it hit a record high of $702.10 a year ago. The selloff was fueled by fears of slowing growth and a perception that Apple's ability to innovate and shake up industries was dwindling.

The new iPhones, coupled with a belief that Apple will announce a deal with the world's largest carrier in China, have spurred investors to build bullish share and options positions in the company over the past two weeks.

Also sparking Apple's upward momentum was hedge fund billionaire Carl Icahn's revelation last month that he had taken a large position and was pushing for the company to expand its program of share buybacks.

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He has said the stock may rise to as much as $700 if Chief Executive Officer Tim Cook pushed for a larger buyback. (Reuters Insider video: The big money betting on Apple link.reuters.com/seg92v)

Industry observers said Apple had not turned out a category-defining electronic device since late co-founder Steve Jobs made a bet on the iPad in 2010. Speculation revolves around a smartwatch along the same lines as Samsung's recently introduced Galaxy Gear, or some sort of TV product.

A NEW ERA

But analysts said neither was likely to generate numbers anywhere in the neighborhood of the iPhone, which supplies half of Apple's revenue and is the company's highest-margin product.

Since the first touch-screen iPhone hit the market in 2007, software features have become easier to replicate and improvements in speed, weight, display size and resolution have become routine. The explosion of me-too products is already hurting profit margins and nibbling at Apple and Samsung's market share.

"Apple needs to demonstrate in the coming months that it has other product lines which can start to make up for slowing growth and falling margins in (the) iPhone and iPad," said Jan Dawson, a chief telecoms analyst for Ovum Research. "That's a tall order."

More immediately, Apple will get a boost if it succeeds in enlisting China Mobile in its iPhone network. For the first time, the company will host media in Beijing just nine hours after its Cupertino, California, launch, spurring speculation it will announce a distribution agreement with the Chinese carrier.

The world's largest wireless carrier serves more than 740 million users and is perceived as more amenable to carrying the popular smartphone now that profit and subscriber growth are decelerating. Net income grew just 2 percent in the quarter that ended in June.

Separately, Japan's largest carrier, NTT DoCoMo, will sell the new iPhone.

Additional reporting by Jennifer Ablan in New York and Malathi Nayak in San Francisco; Editing by Edwin Chan, Tim Dobbyn and Ken Wills